SECURITIZATION

Group-3Neeraj Bhardwaj – 114

Rohit Jain – 125Shraddha Kamat – 128Aditya S Prakash – 143

Devang Shah – 147Rohit K Singh - 151

AGENDASecuritization: Concept, Process, Participants & Classification

Credit Enhancement

Risks

Rating Methodology

Securitization in India

Analysis of RBI Guidelines & Basel II impact

Indian Perspective

SECURITIZATION

Identified pool of assets

Marketable Securities

Credit Arbitrage Transaction

Homogeneous

Sold directly or through SPV

Underlying assets are mainly secured loans like housing loans, auto loans, commercial vehicle loans etc

SECURITIZATION PROCESS

CLASSIFICATION

Securitization

ABS

ABS(Narrow)

CDO

MBS

DIFFERENCES BETWEEN CDO & ABS/MBS

CDO ABS/MBS

Underlying Assets High yield bonds, emerging market corporate debt, sovereign debt,

conventional ABS/MBS

Credit Card Account Receivable, Car loans

etc

Amount of Obligors 100 or 200, or even less than 100

Thousand obligors atleast

Tranche Credit Tranche Time Tranche

Asset Correlation Heterogeneous Homogeneous

CREDIT TRANCHE

• Overcollateralization• Direct Equity Issue • Cash Collateral Account (CCA)• Excess Spread

Internal Credit Enhancement

• Insurance• Letter of Credit• Credit Default Swap• Put Option on assets

External Credit Enhancement

CREDIT ENHANCEMENT

•Risk of nonpayment by underlying assets

Credit Risk

•Interest Rate Risk

•Prepayment Risk

Market Risk

•Servicer Risk

•Commingling Risk

Counterparty Risk

RISKS

RATING METHODOLOGY FOR ASSET BACKED SECURITIES

•Proportion of Used / Refinanced asset

Asset Type

•Depends on Asset Manufacture / Model / Class

Asset Classification

•Creditworthiness of borrower

Borrower Profile

•Geographical Location also poses additional risk

Geographical Distribution

•Indicates the willingness of borrower to repay

Loan to Value Ratio

RATING METHODOLOGY CONTD……•In

dicates the Obligor’s willingness to pay

Installment to Income

Ratio

•Shows the tenure of the Loan

Original Tenure

•It shows the overdue composition of Loans

Payment Status

•Shows the distribution of risks

Number of Borrowers

BASEL II IMPACT

Securitized Exposure

StandardizedApproach

Rated Exposure

Risk Weights

Unrated Capital

Deduction

Internal RatingBased Approach

Rated Exposure Rating

Unrated Exposure

SECURITIZATION IN INDIA Beginning of securitization in India

SARFESI Act

Main players in this segment

NHB

RBI GUIDELINES Criteria for ‘True Sale’

Criteria to be met by SPV

Re-purchase of Assets from SPV

Disclosure to be made by SPV

Funding Alternative Replace receivables with cash and

improves liquidity Balance Sheet Management Re-allocation of Risks Operating Process Efficiency Improves Operating Leverage Improves transparency

Benefits to Originator

Low Event Risk Higher Yield for Similar Risks Portfolio diversification Liquidity Less Volatile and had low default rate historically Aligned as per Investor’s needs

Benefits to economy Enhance the variety of debt Connects capital markets and financial markets Enhance sources of capital

Benefits to Investors

Lack of Appropriate LegislationTrue SaleStamp DutiesTaxation & Accounting

Debt Market Registration Foreclosure Laws Lack of Investor Appetite- quality of

assets

Obstacles in INDIA

Inadequate understanding and pricing of risks inherent in the process of transformation of risks

Growing complexity and lengthening of the chain gave rise to several principal/agent problems.

Fundamental modelling issues

REASONS FOR UNDERDEVELOPED MARKET

MBS market has been relatively slow the long maturity periods, lack of secondary market liquidity and the risk arising from prepayment/re-

pricing of the underlying loan.

Direct assignment of single loan or retail loan pools has been gaining importance Similar to ABS but do not issue any

instrument like PTC Customized deal

CONTINUE….

THREATS IN SECURITIZATION Costly source

Uneconomical for lower requirements

Passes on database to investors

Leaves the entity with junk assets

THREATS DUE TO SECURITIZATION

Securitization may lead to some diminution in the importance of banks

Increase in the volatility of asset values

Competition from Non-Bank Financial Institutions

Increase financial fragility

SECURITIZATION CHANGES THE FUNCTION OF INTERMEDIATION

Securitization leads to better disintermediation for its advantage

Redefines the intermediary's role Eliminates funds-based financial

intermediaries by fee-based distributors

Banks are facing the threat of disintermediation

THANK YOU